Biden’s Student Loan Reforms Are a Looming Disaster

Amid the stir caused by President Biden’s plan to cancel student loan debts, far too little attention has been paid to another far-reaching reform: the administration’s change to a lending program known as income-driven repayment (or IDR). If widely applied, Biden’s proposal would provide additional relief to millions of borrowers — and make the US student loan system even costlier and more dysfunctional than it already is.

Unlike in standard 10-year loans, in which payments are fixed, borrowers in income-driven plans pay a percentage of their earnings each month, plus interest on the principal. The terms of such plans have become more generous since they were introduced in the 1990s. Current students who enroll in IDR pay 10% of their earnings above 150% of the poverty line and have their outstanding balances forgiven after 20 years. Low earners typically pay nothing at all.

The goal of income-driven repayment schemes, which are common in the UK and Australia, is to provide a safety net for borrowers who lose their jobs or encounter other setbacks, reducing their risk of default. In practice, however, the complexity and voluntary nature of the US’s IDR system has limited its take-up among the low-income students who would benefit most. Instead, the bulk of funds dispersed through IDR plans go to those who took out loans for graduate studies — which most will never repay in full. Though less than one-third of borrowers overall are on IDR plans, they account for half of total outstanding student loan debt, carrying average balances that are twice as large as those on standard plans.